The Airport Lounge Business — An Insider’s View of How It All Works

Brian Sumers, Skift

- Dec 12, 2017 2:30 am

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Airport lounges are rarely luxurious, but people love them. Perhaps they crave access to an “exclusive” airport club. So look for more to open soon at U.S. airports. As we learn in this interview, operating a lounge can be a profitable business.

— Brian Sumers

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Editor’s note: This series, called Airline Insiders, introduces readers to behind-the-scenes decision-makers for airlines. Unlike our ongoing airline CEO series, Future of the Passenger Experience, we will not question the highest-ranking executives here. Instead, we will speak with insiders who guide decisions on airline operations, networks, marketing, and the passenger experience.

Today, in the fifth installment of the series, we speak to an executive for a company that develops and manages airport lounges.

Few things excite casual travelers as much as an airport lounge with free pretzels, cookies and — often — mediocre beer, wine and spirits.

Lounges are rarely as luxurious as marketing materials suggest, and even the nicest ones suffer from two basic problems— passengers are rough on the furniture, and greedy at the buffet and the bar. Directly or indirectly, they’ve paid for access, and many do not treat the space as delicately as their living room.

Still, lounges usually are more comfortable than the terminal. And increasingly, especially in the United States, they’re becoming more popular, as more travelers apply for credit cards that include membership in Priority Pass, a network of more than 1,000 lounges worldwide. Travelers with many high-end credit cards from American Express, Chase, Citibank and Bank of America get a free membership, allowing airport club access.

Priority Pass, owned by the UK’s Collinson Group, doesn’t operate any lounges. Instead, it has contracts with clubs, paying the operator a fee each time a Priority Pass member enters. Sometimes, these are airline-branded lounges — some Alaska Airlines and Virgin Atlantic clubs participate — though often they’re not affiliated with any carrier.

Some of those unaffiliated lounges are owned by another company controlled by Collinson — Texas-based Airport Lounge Development. It operates 15 U.S. lounges — most called “The Club” — as well as two in London. In the United States, they’re in Boston, Pittsburgh, Cincinnati, Orlando, Seattle, San Jose and Baltimore, along with several other cities. Each time a Priority Pass member enters one of these clubs, money flows from one part of Collinson to another.

Priority Pass members are not Airport Lounge Development’s only revenue stream. It also caters to major international airlines, including British Airways and Japan’s ANA, giving their premium customers a place to relax while waiting for a flight. Without Collinson’s lounges, the airlines might have to build their own clubs — an expensive proposition for a carrier with only one or two flights a day. In addition, customers without Priority Pass or a premium-class ticket may pay $40 to use a club.

That creates steady revenues and keeps Nancy Knipp, senior vice president at Airport Lounge Development, busy. Knipp, a former managing director at American Airlines, where she managed Admirals Clubs and worked for more than 30 years, helps the company manage lounges and determine where to expand.

We spoke to Knipp recently to learned more about her job, and the trend of third-party operated airport lounges.

Note: This interview has been edited for length and clarity.

Skift: Let’s start with numbers. Major international airlines, including British Airways, and ANA, use some of your U.S. lounges. How do they pay? Is it an overall price? Or do they pay per head?

Nancy Knipp: Generally it’s negotiated at per-guest cost and that per-guest cost varies based on location. A lot of what influences that per-guest cost is the type of menu the airline wants because we also tailor our food service for when that airline is in the lounge. British Airways may want a certain type of cuisine, where maybe Japan Airlines or an ANA would want a different type of food. Or they may want some culturally different food options, such as halal or kosher foods.

We price it out based on what the airline requirements are, primarily from food and beverage, but when the guest comes in, we register them as a visitor coming from, say, British Airways or ANA, and then at the end of each month we invoice and bill that airline.

Skift: How much is an airline paying per head?

Knipp: We prefer not to answer because each of those contracts are confidential. But you can buy access for $40 if you’re just a customer off the street, so clearly it’s going be much below that. We’re not going to charge the carrier the same price we would for a single customer. That gives you an idea of where it would be. It is a very reasonable cost for what the carrier is looking for.

Skift: And every time I bring my Priority Pass card into one of your lounges, does Priority Pass pay you? Or is there an overall deal?

Knipp: All of our agreements are per guest. For every guest that comes in, there’s a payment that comes directly to us as the lounge operator and then whether it’s split with the airport or not depends on the agreement with the airport.

Skift: So you’ll sometimes split revenues with airports?

Knipp: It depends. We can work with airports on a little bit of a different model. What we will do is we will share a percentage of our revenues with the airport so then they get the benefit as we grow our customer audience. As that lounge becomes more popular with the travelers or with the airlines, our guest [numbers] go and up and as our guest [numbers] go up, then the value and revenue to the airport goes up.

Skift: I’ve heard smaller airports want you to build lounges in their terminals, including Pittsburgh. Why’s that so important for them?

Knipp: Well, for a couple of reasons. One, the demand for shared-use lounges has gone up significantly in the last few years. That demand is driven by several things, [including] growth from the credit card companies with their embedded lounge access programs. There are thousands of customers in the concourse who have these credit cards and they want to find a lounge. That demand is putting pressure on the airports to say, ‘Hey, we need a lounge for this customer audience.’

As well, airports are trying to attract new airlines, whether it’s an international carrier or even other domestic carriers who don’t have their own lounges. In order for an airport to grow in some cases, they have to have a lounge. San Jose, California is a great example. San Jose has grown with a number of new international carriers and one of the key components of that was that they had a lounge available that they could use. When we first started in San Jose, I think there was one airline that we took care of, ANA, and now I think we handle six or seven.

Overall, if you look at the whole focus of airports, everyone wants to improve that guest experience. They’re increasing and enhancing the concession and retail side. They want to have something that’s going be attractive to customers to be at the top of the scoring list when it comes to what the customer says about your airport.

The last key driver is the airports are looking to increase revenues. They want new and different concessions. Well, as a shared lounge provider — because we give them a percentage of our revenues — that increases concession revenues, but it doesn’t necessarily take away from concession real estate. We can have a lounge up on the mezzanine where most stores don’t want to be. That way airports can use that portion of their real estate and get some good revenues out of it, even though it’s not a store or a restaurant.

Skift: Your company is growing, but we still don’t see many non-airline operated lounges in the United States. Do you expect that to change?

Knipp: Most certainly. We are seeing it right now. We’re talking to at least probably 10 different airports. They’re all interested in having a lounge and the demand is there. What’s preventing it from the immediate growth is the lack of real estate. There are several airports that we’ve talked to that have said, ‘As soon as we can figure out where to find some real estate, we want a lounge.’ That’s the biggest challenge, but the demand is going to continue to grow. We could have up to 30-plus lounges, if not more, in the U.S.

Skift: Priority Pass has been around for awhile. But it has only recently become part of a credit card arms race. Now almost every travel-centric credit card comes with a membership. That must be great for business, right?

Knipp: It is pretty good, I’ll have to say. I think Priority Pass had agreements with the major financial institutions such as an American Express, Visa, Master Card for several years now. But the Chase Sapphire Reserve came out about a year ago with lots of benefits, one of which, of course, was lounge access. Our guest volumes have grown significantly. If you’re a consumer and you’ve got one of those cards in your pocket, you want to make sure you’re getting a good value out of it, so the lounge has been a good value for the consumer and for us.

Knipp: We get asked that question a lot. American Express customers also have access to our lounges [through Priority Pass], so they’re not really a competitor. We complement each other. If there’s not enough room in a Centurion Lounge because there’s such a high demand, those customers have the option to come over to our lounge. We don’t really want to think of them as a competitor because we’re there to help their customers, and we handle all of the other credit card [holders] that can’t go into their lounge.

Skift: With so many people eligible to use your lounges, you must have some overcrowding issues. Beyond expanding your lounges, how do you deal with it?

Knipp: We’ve learned some tricks, like the kind of seating that will help get more efficiency. If you have a table with four chairs and a table, you might get one, possibly two people sitting at it. That’s not very efficient. We do more banquet seating with different tables lined up in front, or we do more communal tables where people can work on their laptops.

Then the other thing is we started testing this hostess program, which has been extremely successful and, just as an example, we use in Atlanta. Atlanta is probably our busiest lounge, and it certainly has high-peak demands. We have nominal, if any, declined passengers or guests that come into Atlanta and that’s because we help pull their luggage aside, we help them find seats, and we help them rearrange seating if we need to. We’re trying to be very proactive, even our busiest lounge, to avoid declined seating.

Skift: Do you find guests who have paid $40 try to eat or drink their way back to even?

Knipp: There can be that. Sometimes people want to make sure they’re getting the most that they can out of lounge. It comes back down to the traveler. You’ve got travelers who do it so often, and they’re the road warriors. They’ve been there, done that, and they’re most interested finding a place to relax and take it easy.

If you have someone coming in that maybe has never used a lounge — they’ve gotten it as a gift or what have you — they’re probably more inclined to try everything, or have a couple more drinks than they normally would or take a couple more plates of the food than they normally would.

It balances itself out. Sometimes we get customers that don’t eat or drink anything. They really just want to come in and use the restroom. A key component of lounges is, do you have a clean restroom and some place I can sit and put my feet up?

Skift: What’s the most unusual food or beverage request an airline has made? Do they want a certain type of wine, or food? Has it been tough to find anything?

Knipp: We were asked to have pizza in one of our lounges by a European airline. You’d think they would want a certain wine or a [high-end] cuisine, yet they wanted pizza. This was for a fairly premium European airline and they were flying into Vegas. We thought it was an interesting request because that doesn’t seem like something you’d normally have in a premium lounge. But we took care of that.

We get asked for Japanese cuisine, noodles, thing like that, halal offerings, kosher offerings, but the pizza was probably the most unusual.

Skift: Is there a risk sometimes that you’ll put out food so popular you cannot keep up with demand?

Knipp: There are things that can happen like that. Sushi is a good example. People seem to love sushi. I think the perception of the health side of it plus the freshness of it and so on is something that can be challenging. It’s also something that can be expensive because it’s not one of the cheaper items that you can purchase. So fish can be one of those items.

Skift: Do you have tricks to make sure people don’t put snacks in a to-go bag to eat later?

Knipp: There are a few tricks. Some of it just has to do with staffing. You have to have people that are there, making sure the buffet is kept up and they’re helping out to keep things clean and they’re assisting guests with questions. People are less likely to [take items] if someone is standing there helping clean and helping get things organized.

You’ve got to manage it in a way that the guest feels comfortable, and you can control your costs, but they still can enjoy the product without it being rationed out.

Skift: Is it as simple as putting a bowl of potato chips out versus individual bags?

Knipp: You do less prepackaged stuff — that’s part of it — but I will tell you I’ve seen people take scoops of items off the buffet and put it in their own bag. I’m talking about a plastic bag filled with jelly beans or a plastic bag filled with popcorn, not necessarily talking about putting it in your luggage bag.

In my past life, we had to-go bags because we sold food in the lounge and I happened to be sitting on the aircraft and I saw one of our to-go bags coming down on the aisle and I thought, ‘Well that’s really neat. There’s a to-go bag, so somebody bought something in the lounge.’ When the customer got next to me, I saw it was completely full of the pretzel mix that had been in the machine. They had just filled the to-go bag with pretzel mix for their family. I kind of laughed to myself and went, ‘Well, it isn’t exactly the purpose of it, but OK.’ What are you going to do?’

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Photo Credit: Airport Lounge Development runs The Club at SJC, a shared-use lounge in San Jose, California. Premium passengers from many international airlines can use the lounge for free. Airport Lounge Development Inc.